Under a reverse mortgage, an individual borrows money
from an insurer using his or her home equity as security. The insurer
provides either a monthly payment to the individual, a lump sum or an
account upon which the home owner can write checks. When the homeowner
dies, sells the home or moves out of the home the loan becomes due plus an
interest factor. Any balance remaining is then distributed according to
the homeowner's will or trust. The advantage of the reverse mortgage is
that no repayment is required as long as the homeowner is alive and
continues to reside in the home. The homeowner is also not required to
have a certain level of income in order to qualify. The loan is
"non-recourse" so the lender cannot seek repayment from the
homeowner's other assets or heirs. The funds borrowed can be used for any
purpose. A tax benefit is that when the homeowner dies, the home takes a
step up in income tax basis so that capital gains taxes are reduced or
eliminated when the home is subsequently sold to pay off the loan.
There are two factors that are taken into account
when accessing a reverse mortgage loan:
1. The age of the
borrower (the greater the age the larger the amount that can be borrowed);
2. The fair market
value of the home.
There are two types of reverse mortgages:
1. Public Sector Loans.
These are created by state statute and administered by local
government agencies. They are generally available only to homeowners with
low or moderate income and can only be used for a specific purpose, e.g.,
home repairs or payment of property taxes.
2. Private Sector Loans.
These are made by various mortgage lenders such as banks,
credit unions, savings and loan associations, and mortgage banks. They are
generally available to persons of all income levels, funds can be used for
any purpose and there are a wide choice of loan advance types and amounts
in the plans.